Edited version of private advice

Authorisation Number: 1051863998344

Date of advice: 29 July 2021

Ruling

Subject: Income tax - capital allowances - replacement of depreciable plant and equipment subject to involuntary disposal

Questions

1. Will the Commissioner exercise his discretion pursuant to paragraph 40-365(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow the business a further period in which to incur expenditure on replacement assets, more particularly, depreciable plant and equipment, destroyed by fire?

2. Will the Commissioner exercise his discretion pursuant to paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) and allow the business a further period in which to incur expenditure on replacement assets, more particularly, Capital Gains Tax (CGT) assets, destroyed by fire?

Answers

1. Yes

2. Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX.

1 July 20XX to 30 June 20XX.

The scheme commences on:

XX Month 20XX

Relevant facts and circumstances

The Company was severely impacted by fire on XX Month 20XX.

The Company lost CGT assets and depreciating assets.

The insurance claim was not finalised until mid-Month 20XX.

The Company has very limited options for ordering and installing replacement plant, equipment and infrastructure.

Delays were increased by the extent of fire damage in the local surrounding area, making quotes nearly impossible.

Scarcity of resources in the building industry from the building boom due to Covid-19 making it impossible to for the Company to replace its infrastructure before the end of the 20XX financial year.

The replacement of unique equipment needs to be sourced from Xxxxx causing further difficulty due to the COVID-19 pandemic.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-365(3)(b)

Reasons for decision

Question 1

Section 40-365 of the ITAA 1997 allows a taxpayer to choose whether or not to include a balancing adjustment amount in their assessable income where they cease to hold a depreciating asset because it was destroyed.

The taxpayer can choose to use some or all of the amount that would otherwise be a balancing adjustment as a reduction in the cost and/or opening adjustable value of one or more replacement assets. The cost of the replacement asset is reduced by the otherwise assessable amount.

In accordance with paragraph 40-365(3)(b) of the ITAA 1997 this exclusion can only be made where they incur the expenditure on the replacement assets no later than one year, or within a further period which the Commissioner allows, after the end of the income year in which the balancing adjustment occurred.

As per Taxation Determination TD 2000/40, the Commissioner may exercise his discretion to allow further time to acquire the replacement asset in certain circumstances. While TD 2000/40 relates to the discretion available under subsection 124-75(3) of the ITAA 1997, similar principles apply to the discretion contained in paragraph 40-365(3)(b) of the ITAA 1997.

As a fire has destroyed CGT assets and depreciable plant and equipment the Company can choose to apply section 40-365 of the ITAA 1997 for the involuntary disposal of the depreciating assets. We consider that you have made continuing efforts and have done what is reasonable in attempting to acquire replacement assets, and the delays have been outside of your control as per example 2 in TD 2000/40.

Taking the Company's circumstances into account, the Commissioner's discretion under paragraph 40-365(3)(b) of the ITAA 1997 will be exercised to allow the company a further period of time to 30 June 20XX in order to purchase suitable replacement assets subsequent to the involuntary disposal of the original assets due to fire.

Question 2

Subdivision 124-B of the ITAA 1997 explains the circumstances when a rollover is available for a CGT asset that is compulsorily acquired, lost or destroyed.

If you receive money as a result of the compulsory acquisition, you can only choose a rollover if you incur expenditure in acquiring another CGT asset. Under subsection 124-75(3) of the ITAA 1997, you must incur at least some of the expenditure no earlier than one year before the event happens or, within one year after the end of the income year in which the event happens, or a longer time allowed by the Commissioner.

As provided above, TD 2000/40 provides guidance on the circumstances where the Commissioner would exercise the discretion and the Company's circumstances are considered to align with the principles provided in example 2 of TD 2000/40.

Accordingly, the Commissioner will exercise his discretion under paragraph 124-75(3)(b) of the ITAA 1997 and extend the period for you to acquire replacement assets to 30 June 20XX.